Why China Can’t Meet its Polysilicon Demands

The command economy and the free market aren't seeing eye to eye when it comes to polysilicon in China.

China's polysilicon industry has been growing so rapidly in recent years that the government has issued orders to curb factory expansion. Nonetheless, Chinese solar photovoltaic companies still thirst for polysilicon. The resulting imbalance -- along with cost advantages wielded by the more seasoned manufacturers in the West -- means that, to keep exporting silicon modules, China will have to keep importing high-grade silicon.

"Nearly 40 percent to 50 percent of polysilicon supply for the Chinese market will still come from abroad over the next one and half years," said Sam Tong, chief operation officer of LDK Solar, China's largest polysilicon consumer.

For years, the Chinese solar PV industry failed to achieve polysilicon independence. To cut its reliance on imports, China ramped up its polysilicon production output to 18,000 tons in 2009, an increase of 300 percent versus 2008, as reported by Beijing industry watchdog group the Chinese Renewable Energy Society.

This year, about 30,000 tons of polysilicon output in China is expected to come out of local factories, a 40 percent increase over the big jump in 2009 and a five-fold increase over 2008.

Still, the increase still seems too slow to satisfy China's soaring appetite for polysilicon, as Chinese solar giants such as LDK, Trina Solar and Yingli Green Energy are ambitiously expanding their production capacity of solar wafers, which use polysilicon and are later processed into solar cells.

Recently, LDK enlarged its wafer capacity to two gigawatts to become the world's top producer. That expansion has driven the company's estimated polysilicon demand to over 10,000 tons in 2010. While its in-house polysilicon facilities could provide half of that, the rest has to be outsourced.

Looking ahead to next year, when LDK's scheduled internal polysilicon production capacity will reach 18,000 tons, "it is still hard to say if that's enough, as our wafer expansion is also quite large," added the company's Mr. Tong.

To be sure, many polysilicon producers in China are eager to help. But can they?

Official statistics showed that the polysilicon capacity for under-construction projects and planned projects in China was 68,000 tons and 126,700 tons respectively as of September 2009, but only a small portion will be translated into actual output.

That's due to the more stringent requirements needed for project approvals, explains Jiang Qian, an analyst with Shenzhen Zhongzhe Investment Consulting Co. "Lots of facilities, some of which have already broken ground, have been delayed or cancelled as a result of new market-entry standards."

Last year, the Chinese government warned that its polysilicon industry was risking overcapacity and raised the entry standards in terms of operation scale as well as energy consumption. Beijing is now working on a detailed industry development guideline.

In addition, as a result of changing government policy, Chinese polysilicon companies no longer enjoy the green light for finance, commented analyst Jiang. "The banks will not do what they used to do, giving you a loan as long as your business is related to clean energy."

And then there is the attitude of the Chinese module makers. Many have long-term contracts with Western companies that stretch out to 2015 and beyond. Moreover, Chinese companies, because they are relative newcomers, actually don't produce polysilicon as cheaply as their more experienced counterparts.

"Global leaders in the industry are still much further down the cost chain than even the most competitive Chinese poly producers," said Charles Yonts, an analyst with CLSA Asia-Pacific Markets, an independent brokerage and investment group in Hong Kong.

Data from CLSA show that world-class polysilicon companies had brought their average production cost down to US$20 to US$35 per kilogram by mid-2009. However, by comparison, China's largest polysilicon company, GCL-Poly, just caught up with the international level earlier this year, with its new record price of US$35 per kilogram.

Chinese polysilicon production cost is estimated to have reached US$45.5 per kilogram in March 2010, according to CLSA's recent research on eight domestic companies.

Although GCL-Poly could completely close the cost gap later next year, Mr. Yonts predicts that will likely take much more time for other Chinese polysilicon producers. "They [GCL-Poly] have a one-to-two-year head-start on the rest of China," Yonts said.